Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy

Viral Acharya and Jennifer Carpenter ()

No 3328, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses corporate bond valuation and optimal call and default rules when interest rates and firm value are stochastic. It then uses the results to explain the dynamics of hedging. Bankruptcy rules are important determinants of corporate bond sensitivity to interest rates and firm value. Although endogenous and exogenous bankruptcy models can be calibrated to produce the same prices, they can have very different hedging implications. We show that empirical results on the relation between corporate spreads and Treasury rates provide evidence on duration and find that the endogenous model explains the empirical patterns better than typical exogenous models.

Keywords: Corporate bonds; Call; Default; Stochastic interest rates; Endogenous bankruptcy; Optimal exercise boundary; Hedging; Duration (search for similar items in EconPapers)
JEL-codes: G12 G13 G31 G33 (search for similar items in EconPapers)
Date: 2002-04
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (62)

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Journal Article: Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy (2002)
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